However, while frontier markets are showing rapid growth, this is from a relatively low level and even if there are established capital markets, they may not be very extensive and the issue of liquidity must be remembered, says Oliver Bell, portfolio manager, T Rowe Price Frontier Markets.
“One of the key things institutional clients, including pensions funds need to look at is whether this opportunity set is big enough and liquid enough so they can make a sizeable allocation,” says Bell.
This is because the frontier is small in comparison to emerging and developed markets – perhaps 1% the total global market equity, suggests Bell – and clients need to think beyond the single index.
“For example, Saudi Arabia on its own is between $200bn and $300bn, so by including Saudi Arabia, you can triple the market cap. There is also potential for some really big markets to come into the indices, such as Iran,” adds Bell.
We are seeing the kind of growth that was experienced in the emerging markets over the past 15 years, he adds.
“Frontier markets may make up a very small percentage of the total market cap, but they make up 18% of global GDP. The US on its own is around 18%, so there are opportunities, particularly as the populations which already make up a third of the global population continue to grow.”
The danger with demographies like this is if the growth does not happen. Then you have a scenario like the one witnessed in Libya and elsewhere, during the Arab Spring, where large numbers of unemployed young men vented their frustrations through civil unrest.
POLITICAL RISK
Though important, liquidity isn’t necessarily the first thing that springs to mind for most investors when considering frontier markets.
Thirty years ago, most of the growth hotspots in Asia were wracked by bitter civil war, and more recently the same was true in Africa.
Yet, that has changed and democracy has become the prevailing model in most of sub-Saharan Africa. Ivory Coast had a civil war in 2011 over an election result. The government defaulted, but with a large and well-educated population and promising prospects before the war, it turned out to be a long-term good investment for investors who stayed in. But you don’t always get that lucky and political risk will remain the way of life in Africa, at least for the time being, says Kaan Nazli, senior economist at Neuberger Berman.
“We have a country model and in that, ESG makes up 40% – and political risk is a part of that – alongside worldwide statistics, transparency, etc, so when a country comes to the market for the first time, it helps you to position them in comparison to others.”
Comments